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The aftermath of 5/6/2010 Part 1

|Includes:EWA, IWB, IWM, MDY, SDS, SH, SPY, UUP, iPath S&P 500 VIX Short-Term Futures ETN (VXX)
On April 19th we put out a market call stating, "while i do not believe that we are in for another move below 7000 on the Dow, a strong market correction should be lurking right around the corner" We also pointed out that rather than buying SH or SDS to hedge your portfolio, we felt that VXX would be better. Do you remember the rationale? "VXX is emiting Alpha. For every 1% drop in the market VXX is jumping 5%, and for every 5% gain in the market VXX is only dropping 1%. These skewed performance numbers should continue to climb until the VXX exceeds $30 a share" Well, I think we need to re-visit our outlook and plan. VXX is now at $27 and has resulted in a 50% gain while the S&P has fallen only 7%. I still believe that VXX will continue to emit Alpha, and that we can continue to expect oversized returns in the VXX versus the VXZ, but you may need to consider buying a short index product to hedge your core holdings, while converting the VXX to a pure alpha play.  We wholly expect to see Portugal debt downgraded by two notches, followed closely by another downgrade of Spain. The perfect storm of continued implosion in the Euro and lack of funds to rescue other EU nations like Ireland and Italy should result in a prolonged selloff with heavy volatility as macro events unfold and bailout announcements are made.
 
With the question no longer being "will the euro implode and will the other EU nations be effected?" but now being, "How bad will it get?" the alternatives for your portfolio get a little wider. The VXX, which was being used as an Alpha generating hedge on the broad markets, now becomes a part of the performance generating aspect of your portfolio, while SH, SDS or any of the short index products become the hedge on your core holdings. So what other sectors are affected by the European crisis? Again, the  US Dollar will continue to strengthen and continue to keep a ceiling on oil prices and halt a commidity bubble ex-precious metals. So UUP will continue to be a strong and safe buy, as well as Gold. Also, a short on Oil or OIH is an easy play with the dollar keeping barrel prices in check. Most PM's will have to keep their core holdings in SPY, MDY or IWO, IWM to mimic the market, but there may be other sectors worth taking secondary or tertiary positions in. The include Biotech index, Australia (NYSEARCA:EWA), Water and infrastructure (PHO, IGF).
 
While this is mainly to keep you abreast of our belief that VXX is changing dynamics from a hedge to a performance generating position, and to reiterate our UUP and oil feelings, it is in no way comprehensive to all of our positions and thoughts. Please continue to view our daily technical report which lists actionable ETF trade ideas, or contact us for help  identifying ETF's that give you specific exposure you are searching for and we will continue to keep you abreast of our feelings on the VXX and UUP trades.
 
Thanks,
Scott Freeze

President of Street One Financial 

 
 
 
 

Disclosure: No positions
Stocks: VXX, SH, SDS, EWA, SPY, MDY, UUP, IWB, IWM